Real Estate Investments for a Secure Future

Characteristics of Generation Y and Its Effect on Apartment Demand

At MPF Research, we are often asked: How can the U.S. apartment market record such strong demand given that employment growth has been lukewarm and that increasing numbers of Generation Y – the key demographic for the apartment industry – are living at home with Mom and Dad?

Recent apartment demand numbers have been far above what anyone likely would have predicted during the downturn in the economy. Since 2009, the U.S. apartment sector has absorbed nearly 800,000 units on net. The last time demand proved remotely comparable over a three-and-a-half year stretch was from 1997 to 2000. The difference, though, is that the U.S. employment market was in substantially better shape back then – expanding at an average annual rate of 2.4%. Since 2009, annual employment growth hasn’t topped 1.6%. That amounts to about 1 million fewer jobs being created per year, of late. And the share of Gen Y living at home with parents has grown from 19% to 24% over the last decade, according to a recent study.

So how can apartment demand be so strong given those headwinds? There are two major demographic trends at work.

Generation Y is Delaying Marriage

Many analysts first point to the nation’s falling home ownership rate. But that’s only part of the story – and perhaps a smaller piece than most people think, given that most families losing their homes to foreclosure end up back in the single-family home market as renters.

There are arguably more important, though less-discussed, factors at play. There are simply more young adults than ever before. And, furthermore, a smaller share of them is getting married, which limits the likelihood that home ownership is their desired living situation.

Let’s do some math. Right now (well, technically as of the 2010 Census), there are 62.6 million people between the ages of 20 and 34. Within this group, 59%, or 36.7 million people, have never been married.

(Some 31%, or 19.4 million people, are married, and another 10%, or 6 million people, have been married at some point in the past but aren’t now.)

Looking back to 2000, the number of 20- to 34-year-olds was modestly smaller at 58.6 million, and the number of never-married folks in the group was much, much smaller at 27.5 million, because the share of adults remaining single through their early- to mid-30s has shifted by a drastic 12 percentage points over the course of the past decade.

That means we have 4 million more young adults than we did in 2000 and a whopping 9 million more never-married young adults compared to the decade-earlier figure.

Those patterns clearly are positive for the apartment sector, though the exact impact is tough to quantify. The numbers above shouldn’t be construed as one person, one household. Gen Y has a variety of living arrangements, including living alone, with one or many roommates, or with a partner, which is increasingly common. It is reasonable to assume, however, that with a growing pool of young adults – and, perhaps even more significantly, with fewer of them getting married – the pool of prime prospects for apartments is much, much bigger than it was previously.

So how long can apartment demand remain strong? While many members of Gen Y have delayed marriage, a large number of them will likely tie the knot eventually. And with the economy improving to some degree and with home prices no longer deteriorating in most areas, more of them will look to finally take the home ownership plunge, as well. However, that doesn’t mean apartment demand will taper off.

Generation Y is Living with Mom and Dad

Let’s examine the Boomerang Generation. It’s a catchy moniker given to members of Gen Y who are living with their parents, and it’s been an impediment to apartment demand thus far. However, if the apartment sector starts to see more renters lost to home purchase, it will likely be a byproduct of an improving economy. And a better economy means more jobs – and more of Gen Y leaving Mom and Dad.

Doing some calculations based on Census data and a recent study by Ohio State University, there are about 15 million young adults living with parents, up roughly 3.9 million from the count seen in 2000. It’s safe to assume many of them will eventually end up as apartment renters.

At the same time, the size of the population reaching adulthood will remain at peak levels. The youngest members of Generation Y are still in their mid-teens. An even moderately better economy should translate to fewer 20-somethings boomeranging home to Mom and Dad.